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Libertarianism & Antitrust: A Brief Comment

by on June 7, 2011 · 6 comments

Over at his blog, our old TLF colleague Tim Lee has been discussing the AT&T – T-Mobile merger and the ways libertarians should think about antitrust more generally.  In his latest post, he pushes back against a brief comment I posted on a previous essay. You can head over to his site and read that exchange and then see my latest comment. But I thought I would also post it here for those interested.

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Tim… My thinking on antitrust is very much shaped by the choice between ex ante vs. ex post regulation. How much faith should we place in sector-specific regulators to get things right through preemptive, prophylactic regulation versus allowing things to play out and then — on the rare occasions when intolerable monopolies over essential goods develop — letting antitrust regulators devise a remedy?

More than any other economic value, I care about experimentation. I am completely under the sway of the Austrian School of thinking about markets and competition as an ongoing experiment, an evolutionary journey, a discovery process.  How are we to know if intolerable monopolies over essential goods will actually develop unless we let things play out?

As I argued in my critiques of the Lessig/Zittrain/Wu school of thinking, we need to be a bit more humble and have a little faith that ongoing experimentation and discovery will help us evolve into a better equilibrium. It’s during what some regard as a market’s darkest hour when some of the most exciting forms of disruptive technologies and innovation are developing. [I’ve elaborated more on this point in this lengthy discussion about Gary Reback’s recent book on antitrust.] Continue reading →

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Thoughts on Wu’s Master Switch, Part 6 (His Audacious Information Industrial Policy)

by on November 2, 2010 · 602 comments

I’m going to close out my series of essays about Tim Wu’s new book, The Master Switch: The Rise and Fall of Information Empires, by discussing his proposed solutions.  In the first five essays in the series, [1, 2, 3, 4, 5] I’ve critiqued Wu’s look at information history as well as his use of terms like “market failure,” “laissez-faire” and “open” vs. “closed.”  I argued there’s a great deal of over-simplification, even outright distortion, in his use of those terms throughout the book.

Anyway, let’s run through the basics of the book once more before getting to Wu’s proposed solutions.  By my reading of The Master Switch, Wu’s argument essentially goes something like this:

  • Information industries go through cycles. After a period of “openness” and competition, they tend to drift toward “closed,” corporate-controlled, anti-consumer models and outcomes.
  • The resulting “monopolists” then block much innovation, competition, and free speech.
  • Consequently, “the purely economic laissez-faire approach… is no longer feasible.”
  • Moreover, information industries are more important than all others (“information industries… can never be properly understood as ‘normal’ industries”) and even traditional forms of regulation, including antitrust, “are clearly inadequate for the regulation of information industries.” (p. 303).
  • Thus, special rules should apply to information-related sectors of our economy.

Again, I’ve challenged some of these assertions in my previous essays, specifically, Wu’s incomplete history of cycles and the fact that he greatly underplays the role of governments in “locking-in” sub-optimal market structures or, worse yet, creating those structures through misguided public policies or regulatory capture.  Wu discusses some of those factors in his book, but he tends to regard them as secondary to the inquiry, whereas I believe they are crucial to understanding how most “closed” or anti-competitive scenarios develop or endure. Instead, Wu simplistically suggests that “the purely economic laissez-faire approach… is no longer feasible,” even though no such state of affairs has ever existed within communications or media industries. They have been subjected to varying levels of indirect influence or direct control almost since their inception.

Regardless, what does Tim Wu want done about the problems he has (mis-)diagnosed? Continue reading →

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Thoughts on Tim Wu’s Master Switch, Part 3 (What is “Laissez-Faire”?)

by on October 27, 2010 · 10 comments

This is the third installment in a series of essays about Tim Wu’s new book, The Master Switch: The Rise and Fall of Information Empires.  As I noted in my first essay, Wu’s book promises to make waves in Internet policy circles, so I’m devoting some space here to debunking what I regard as some of the myths that drive his hyper-pessimistic worldview regarding the supposed death of openness.  In my second essay, I challenged Wu’s view of technological “cycles” and “market failure” and noted that he paints an overly simplistic portrait of both. In a similar vein, in this installment I will address Wu’s mistaken claim that purely free markets and “laissez-faire” have guided America’s communications and media sectors over the past century.

Wu’s narrative in The Master Switch is heavily dependent upon his retelling of the histories of several major sectors: telephony, film, broadcast radio, and cable television.  After surveying the history of those sectors throughout the past century, Wu concludes that “the purely economic laissez-faire approach… is no longer feasible” (p. 303) and that a fairly sweeping new regulatory regime – which I will address in a forthcoming post – is necessary to address the imperfections of the free market.

As any serious historian of the past century of information industries knows, however, we’ve never had anything remotely resembling a “purely economic laissez-faire approach” to communications, media or information policy in this country.  We’ve had a mixed system that allowed a certain degree of market activity accompanied by very heavy doses of “public interest” regulation.  Indeed, the story of 20 th century communications and media markets is one of artificial barriers to entry, government (mis-)allocation of key resources (like spectrum), price controls, rate-of-return regulations, speech controls and mandates, regulatory capture, and good ‘ol boy corporatism. Continue reading →

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Cable Franchise Deregulation and Broadband Deployment

by on May 5, 2010 · 3 comments

A recent study by Cecil Bohanon and Michael Hicks at Ball State University’s Digital Policy Institute found that statewide cable franchising has increased broadband deployment.

Half of the US states have now enacted legislation that creates statewide cable franchising. These laws allow new entrants into the video business (principally the phone companies) to get permission to offer video from the state, instead of having to deal with local governments to get cable franchises. Previous research, much of it cited here, found that cable competition reduces cable rates and expands the number of channels available to subscribers. Local franchising often delayed or prevented new competitors from entering the market.

Since the same wires get used to transmit video, telephone, and broadband, Bohanon and Hicks reasoned that opening up entry into cable would also increase competition in broadband and hence increase broadband subscribership. And that’s precisely what their econometric study finds. After controlling for other factors, broadband subscribership is 2-5 percent higher in states that have statewide video franchising. Based on this finding, Bohanon and Hicks estimate that statewide video franchising increased broadband subscribership by about 5 million.

Their study covers the years 1999-2008. Maybe some of these 5 million would eventually have gotten broadband anyway. At worst, this study shows that 5 million subscribers got broadband sooner than they otherwise would have.

The study does not test whether the increase in broadband subscribership occurred because statewide video franchising sped up investment and deployment of infrastructure, or if it simply spurred competition in places where phone and cable companies already had the relevant infrastructure deployed.  I don’t know how one would get the confidential data on broadband investment in order to test this.  But given the large amount of new investment related to broadband, I’d be willing to bet that statewide franchising encouraged both new broadband deployment and more intense competition where infrastructure was already in place.

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Broadband and Title II Regulation: An Economic Primer

by on April 16, 2010 · 4 comments

Last week the D.C. Circuit Court of Appeals ruled that the Federal Communications Commission cannot impose net neutrality rules on broadband providers under its “ancillary jurisdiction” under the Communications Act.  If it wants to impose net neutrality, the FCC must first reverse previous decisions and reclassify broadband as a “Title II” common carrier.

Whoa!  The previous two sentences prove that this economist has been spending way too much time around telecom lawyers.

In almost-plain English, the court decision means the FCC cannot impose net neutrality regulations unless it publicly changes its five-headed mind and decides that broadband is much like an old-fashioned telephone monopoly and should be regulated much the same way. 

A lot of regulatory economists pretty much gag at this idea, or worse. Non-economists wonder what triggers this visceral reaction.

Let me explain.  As the recipient of 8 years of excellent Jesuit education, of course I have three reasons.

First, anyone who follows the scholarly literature on economic regulation generally knows that this form of regulation has a pretty checkered track record. In a wide variety of industries, economic regulation has increased prices, inflated costs, stunted innovation, and/or created shortages. In addition, because this regulation transfers enormous amounts of wealth — $75 billion annually in the case of federal telecommunications regulation — it creates enormous incentives for firms to lobby and litigate to bend the rules in their favor. While big corporations may feel they benefit from these expenditures, from a society-wide perspective the fight over wealth transfers is pure waste because it rarely produces anything of value for consumers. 

Utility regulation works best in relatively stangant industries where a company makes a big capital investment, pays a few employees to run it, and doesn’t need to innovate much.  In those kinds of situations, it’s easier for regulators and other outsiders to determine costs, set some rates that let the utility earn a reasonable rate of return, and keep the regulated company from gaming the system too much. If you think this describes broadband, well, good luck. A local water utility is probably the best example.

Second, anyone knowledgeable about the economic theory underlying utility regulation (which includes most economists who specialize in the area, and some lawyers) understands that regulation is supposed to be a last resort for “natural monopoly” industries where it’s cheaper to have one firm serve the entire market. A monopolist protected from competition could increase prices, degrade service, or do other things that increase its profits while harming consumers; economic regulation seeks to prevent those behaviors. But if competition is possible, competition is preferable. 

When phone, cable, wireless, and satellite companies bombard us continually with solicitations to switch to their broadband services, and I can see multiple wires running down the street outside my house when I go up on the roof to adjust the satellite dish, it’s pretty darn obvious that broadband is NOT a natural monopoly, even if competition isn’t “perfect.”  Therefore, broadband lacks a key prerequisite for public utility regulation to possibly increase consumer welfare.  Indeed, the most anti-consumer results of economic regulation have occurred when government created monopolies, cartels and/or shortages by imposing this regulation on industries where competition is possible, such as cable TV, trucking, railroads, airlines, oil, and natural gas.

Third, recent economic studies find that the FCC’s decision to classify cable, DSL, and fiber broadband as a less-heavily-regulated “information service” generated a tsunami of investment and spurred competition. See, for example, this study by my GMU colleagues Thomas Hazlett and Anil Caliskan. Some more cites are available on pp. 17-18 of this comment to the FCC. If you don’t believe economic studies, just keep in mind that the aggressive marketing of dirt-cheap entry-level DSL tracks pretty closely with the FCC’s decision that DSL is an information service not subject to Title II regulation.  Coincidence?

So, please excuse those of us regulatory economists who vomit when the subject of Title II comes up. If you check out the links above, perhaps the reaction will be more understandable.

I have not addressed the question of whether it’s realistic to think that reclassification of broadband under Title II could be a workable mechanism to impose just a limited, targeted, surgical, light-handed, smart, data-driven, evidence-based, transparent, transformative, sustainable, green, hybrid, itsy bitsy teenie weeny yellow polka-dot bikini smidgen of net neutrality regulation to prevent only certain forms of anti-consumer discrimination, without imposing the customary broad panpoly of public utility price and service regulation. Whether that’s possible in theory, or likely in real-world political practice, is a different issue for a different day. (Whether the other name for that kind of regulation is “antitrust” is also a different  issue for a different day.) For the moment, I just wanted to provide some context on the broader Title II issue.

And now I’ll go clean off my shoes.

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Railroading Broadband?

by on February 18, 2010 · 0 comments

FCC Chairman Julius Genachowski’s comparison of broadband with electricity in a speech this week has generated mixed reviews in the blogosphere. Manny Ju says that this shows Genachowski “gets it” — that he understands the transformational power of broadband and how it will come to be regarded as a ubiquitous necessity in the years ahead. Scott Cleland is more alarmed: “The open question here is electricity transmission is regulated as a public utility. Is the FCC Chairman’s new metaphor intended to extend to how broadband should be regulated?”

It may surprise some technophiles, but this kind of discussion even predates electricity. The advent of the railroads in the 19th century brought similar arguments.  Railroads were usually a heck of a lot cheaper way of hauling goods and people across land than the next best alternative at the time: wagons. Railroads were “The Next Big Thing” that no town could do without — especially if the town lacked access to navigable waters. Lawmakers handed out subsidies (often in the form of land grants), then regulated railroads to control perceived abuses, such as discriminatory pricing for different kinds of traffic or traffic between different locations. Henry Carter Adams, the godfather of economic regulation in the U.S., said all shippers deserved “equality before the railroads.” Even today, commentators lament the rural towns that people abandoned because they lacked rail access. Deja vu all over again! 

As long as we’re deja-vuing, let’s remember a few little problems America encountered down the railroad regulatory track:

  1. Subsidies created “excess capacity” — that is, more capacity than customers were willing to pay for. In some cases, subsidies attracted shady operators into the railroad business whose main goal was to get land grants or sell diluted stock offerings to the public, not build and operate railroads. 

  2. Regulation ended up caretlizing railroads and propping up rail rates, which faced downward pressure because of the excess capacity.

  3. When another low-cost, convenient alternative (trucking) came along in the 1930s, truckers got pulled into the cartel when they too were placed under Interstate Commerce Commission regulation to keep them from undercutting rail rates.

  4. Despite cartelization, by the late 1970s, 21 percent of the nation’s railroad track was operated by bankrupt railroads, even though the railroads had shed unprofitable passenger service to Amtrak earlier in the decade. Part of the reason was excessive costs: Because access to freight rail service was still considered a right, regulation prevented railroads from abandoning money-losing lines. Part of the reason was restraints on competition: The regulatory passion for “fair” pricing kept railroads from competing aggressively with each other or with truckers. When the Southern Railway introduced its 100-ton “Big John” grain hopper cars in the 1960s, for example, it couldn’t offer shippers lower rates in exchange for high volume until it appealed an Interstate Commerce Commission all the way to the Supreme Court.

By the late 1970s, a Democratic president, a bipartisan majority in Congress, and economists across the political spectrum agreed that railroad regulation needed a radical overhaul. Regulatory reforms made it easier for railroads to abandon unprofitable service, in many cases turning track over to new, lower-cost short lines and regional railroads. Prices for more than 90 percent of rail traffic were effectively deregulated. At the same time, Congress deregulated rates and entry on interstate trucking routes. This encouraged rail-truck competition and also allowed each mode to specialize in serving those markets it could serve at lowest cost.

Rail rates fell, and railroads came out of bankruptcy. The current system is hardly perfect, but most economic research suggests that most consumers, shippers, and railroads are much better off now than they were under the old regulatory system.  (For reviews of scholarly research on this, check out Clifford Winston’s paper here  or my article here.)

Will we repeat the cycle with broadband? I don’t know, but to this railfan, the current broadband debate is looking soooo retro — as in 19th century!

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A Brief History of Media Merger Hysteria: From AOL-Time Warner to Comcast-NBC

by on December 2, 2009 · 147 comments

I’ve just released a new PFF white paper looking at the hysteria that has often accompanied major media mergers and then taking a look at the marketplace reality years after the fact.  Here‘s the PDF, but I have also pasted the entire thing down below.

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A Brief History of Media Merger Hysteria: From AOL-Time Warner to Comcast-NBC

by Adam Thierer

Although the pending union of Comcast and NBC Universal has not yet made it to the altar, Chicken Little-esque wails about the marriage have already begun in earnest. For example, the pro-regulatory media organization Free Press has already set up a website to complain about the deal.[1] And Jeff Chester, executive director of the Center for Digital Democracy, has called it “an unholy marriage.”[2] The fever only promises to spread once the deal is formally announced, and a lengthy fight over the deal is expected at the Federal Communications Commission (FCC) and whichever antitrust agency reviews the deal.[3]

But reality tends to play out somewhat less dramatically than the script penned by the media worrywarts. It’s worth looking back at some of the more prominent examples of media merger hysteria in recent years to understand why such panic is unwarranted, and why a deal between Comcast and NBC Universal is unlikely to lead to the sort of problems that the pessimists suggest.[4] Continue reading →

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No wine from Amazon for now

by on October 27, 2009 · 0 comments

A recent article by Lisa Carley in the New York Wine Examiner reports that Amazon is suspending plans that would have allowed wine producers to sell direct to consumers.  The culprit? State regulations:

One of the main reasons why this program has been put on hold is the complexity of wine-shipping laws within the United States, and that fact that the major wholesalers spend millions of dollars on the state level to keep it difficult for the consumer to have access to wine they want at good prices.

About 35 states permit some form of direct shipment to consumers, but laws vary greatly. In Virginia, consumers can order wine from any winery or retailer licensed in any state, as long as the seller registers with the state of Virginia and collects taxes. In Maryland, direct shipment of wine to consumers is still a felony. Montana limits the total amount of wine any consumer can order to 12 cases per year, which means most wineries won’t ship there because an individual winery has no way of knowing how much wine the consumer has ordered from other sellers. I’m not making this stuff up; check the Wine Institute’s compendium of state laws.

In several studies, Alan Wiseman and I found that consumers can enjoy significant savings on higher-priced wines if they order online.  (The savings disappear for wines priced under $20 per bottle because of shipping costs.) The Internet also gives consumers access to wines that they might not find by simply walking into a store.   

It would be a shame to see Amazon’s idea die. Currently, a winery or retailer that wants to ship directly to consumers has to figure out and comply with each state’s laws. It makes a lot of sense that a single retail sales portal could consolidate and continuously update this information, then set up a system that lets any seller market its wine direct to consumers in states where that’s legal, in compliance with all state laws.

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Social Advertising Is Just Around the Corner: Why A Facebook Ad Network Would Benefit Users

by on October 1, 2009 · 17 comments

It seems the whole web is incorporating social networking functionality. Microsoft recently led the way in incorporating functionality to search, allowing users to share search results they like with their social networking contacts directly from the search results page through Twitter and Facebook. I’ve also noted that it’s just a matter of time before the same thing happens with advertising—and that Facebook will likely lead the way.

Facebok Olive Garden AdWebsites have long used social networking buttons to encourage visitors to join their Facebook group, follow them on Twitter, etc. Facebook recently made this even easier by creating a widget for pages that can easily be embedded on any site. So why is Facebook blocking advertisers from including social networking functionality in ads like this one? Facebook’s terms of service using the new Fan Box widget in ads. Facebook’s spokesperson told InsideFacebook.com:

We want Page owners to have an easy way to connect with fans both on and off of Facebook.  In order to protect the the Fan Box widget from being used for the wrong reasons, we do not allow it to be used in third party advertising.

InsideFacebook.com speculates:

it’s safe to assume that Facebook wants to protect the “Become a Fan” experience from becoming too intertwined with aggressive online ads that it hasn’t approved. One can imagine the variety of ways advertisers could (potentially misleadingly) push users to become a fan in an ad unit on a web site, then pollute their Facebook stream later. Facebook wants more control over that experience, even if it means partially restricting growth for Facebook Pages.

So why might policymakers be interested in this? Because, as Fred Vogelstein predicted in Wired this June, Facebook will likely someday soon expand beyond selling ads on its own site to selling ads on the wider Internet that incorporate social networking functionality like the “Become a fan” button above. There is a vast untapped market for online advertising, and if Facebook’s going to get a piece of it, they’ll have to offer something no other ad network can. If and when this happens, Facebook will likely get a lot of grief from the anti-advertising zealots, but this would actually be a good thing for consumers for five reasons: Continue reading →

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“Google Bigotry,” Corporate-Bashing & Human Envy

by on September 6, 2009 · 10 comments

Interesting piece from Jeff Jarvis about “Google Bigotry,” or his belief that “media people are going after Google’s success for no good reason other than their own jealousy.”  Jarvis argues that reporters penning hard-nosed stories about Google are, in reality, just a bunch of envious cry-babies:

newspaper people will use their last drops of ink to complain about Google’s success and try to blame it for their own failures rather than changing their own businesses. ..  It’s not just that they dislike the competition – and they do, for it is a new experience for too many of them. If they were smart, they’d use Google to get more audience and make more money but they don’t know how to (or rather, they’d prefer not to change). No, the problem is that Google represents change and a new world they’ve refused to understand.

Well, yes and no.  I don’t believe that every story penned about Google by a mainstream media reporter is rooted in envy, and certainly not the one that Jarvis alludes to as prompting him to pen this piece.  Jarvis apparently received an inquiry from a French journalist at Le Monde asking for comment about “an article about Google facing a rising tide of discontent concerning privacy and monopoly.”  That doesn’t necessarily sound like an unreasonable journalistic inquiry to me. So, I’m not sure it’s fair to accuse every journalist who calls with a hard-nosed question about privacy and antitrust as being guilty of “Google bigotry.”

That being said, some journalists are likely feeling a bit miffed about Google’s recent success, thinking it comes at their expense, and, therefore, their envy might be prompting some of them to pen attack stories on the company.  I think Jarvis in on stronger ground, however, in asserting that most privacy and antitrust complaints about Google are unfounded, and also based on envy. Indeed, Berin Szoka and I have have been cataloging the complaints that we believe are driven by an irrational form of corporate envy we call “Googlephobia.”  And in prior years we saw a similar form of Microsoft-bashing at work that we still have with us today. That’s why I think Jarvis is on to something when he notes that Google-bashing represents a broader sociological phenomenon: Continue reading →

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